Vredestein has been selected as tire supplier for Volkswagen Polo, SEAT Ibiza and Ford EcoSport models in Europe, according to the company’s media release. We believe that this is a significant order win and improves visibility of capacity utilisation of Hungary plant over the next 1-2 years. Assuming 20-40% market share of Vredestein in these car models, annual tire supplies from the company’s Hungary plant could be 0.6-1 million units. Our recommendation and TP are suspended as our associate company is manager to Apollo’s plans to issue securities via Qualified Institutions Placement (QIP).

According to the company, there are several other OEM approvals in the pipeline for supply of passenger car tires. We note that Vredestein has been a replacement market focused tire company in Europe so far but the company is now gearing up for greater presence in the European tire market and is looking to expand supplies to the European OE market.

As per our understanding, the company will start supplying tires to OEMs initially from the Netherlands plant and gradually production will be shifted to the Hungary plant once the capacity is available in that plant. Over the medium term, the company is targeting 20% volume mix from OEMs in Europe from negligible currently, excluding sales of Space master tires; this implies that 40% of overall Hungary capacity (5.5 million units) will likely be utilised to supply tire to OEMs over the medium term.

As per our calculations, combined sales volume of the three models was around 500,000 units in Europe in CY2016. Of this, sales volume of VW Polo was around 300,000 units while the volume of other two models was around 200,000 units in Europe. In our view, OEMs will likely have 2-3 tire suppliers for these types of models while higher-volume models will likely have more suppliers.

Assuming 20-40% market share of Vredestein in these car models, annual tire supplies from company’s Hungary plant could be 0.6-1 million units for these models. We believe that this is a significant order win and would help in improving utilization of Hungary plant over the next 1-2 years. In our estimates, we build in sales volumes of 2.5 million units in FY2019E, 45% utilization and 3.5 million units in FY2020E, 64% utilization from the company’s Hungary plant.